When an arbitration clause is incorporated by reference, such clause is not set out in the main contract signed by the parties but rather found in a separate and pre-existing document referenced by the main contract. Through this, the parties declare that the standard terms or the arbitration clause that they have incorporated should be considered as part of the main contract they signed. In such cases, the parties either refer to an arbitration clause in a pre-existing agreement that they have signed before or adopt the standard terms issued by international trade or industrial organizations due to the international nature of the contracts they enter into. Standard terms that include arbitration clauses such as FIDIC (International Federation of Consulting Engineers) or BIMCO (Baltic and International Maritime Council) are commonly incorporated into contracts by reference. The purpose of this article is to analyze the validity and enforceability of the incorporation of arbitration clauses by reference, with a specific focus on Turkish Law regulations.
The New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (“NY Convention”) does not expressly stipulate whether arbitration agreements incorporated by reference are valid and effective. However, some courts around the world, including Turkish courts, have approached the issue from the perspective of the form requirement as an enforcement condition as set out under the NY Convention and have broadly interpreted the written form requirement provided under Article II of the NY Convention when deciding on the validity of arbitration clauses incorporated by reference, as explained below.
Whether an Arbitration Clause Incorporated by Reference would be Valid
Under Turkish Law
Form of Arbitration Agreement
The question of whether an arbitration clause incorporated by reference is included within the content of the main contract is a matter of validity of the arbitration agreement. The rule regarding the form of arbitration agreements in Turkish law is regulated under both the Law on International Arbitration (the “LIA”) dated 21/6/2001 and numbered 4686 and the Code of Civil Procedure dated 12/1/2011 and numbered 6100 (the “CCP”). As per Article 4(2) of the LIA, “An arbitration agreement shall be made in writing… A valid arbitration agreement is deemed to have been made in the event that a document containing an arbitration clause is incorporated by reference in order to be made part of the main contract.” Accordingly, as per the explicit provision of the LIA, the incorporation of an arbitration agreement by reference is sufficient to fulfill the written form requirement of the LIA. The same rule finds application in terms of domestic arbitrations under the CCP. Indeed, Article 4(2) of the LIA and Article 412(3) of the CCP contain the same regulation regarding the form of the arbitration agreement.
The effects of these provisions can be clearly seen in the case law of the Turkish courts. In fact, there are precedents of the Court of Appeals in this regard that broadly interpret the written form requirement under Article II of the NY Convention in 1997, even before the LIA came into force. Article II of the NY Convention states that “agreements in writing shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Here, the court decided that the parties may apply to an arbitral tribunal when it could be understood from the exchange of letters between the parties that there was a contract subject to the FOSFA rules.
Whether the Arbitration Clause Incorporated by Reference Includes the Consent to Arbitrate
The validity of the arbitration agreement pertains to both formal and substantive validity. Since the parties should have the free and genuine will to establish an arbitration agreement, it must be determined whether the parties had actually consented to arbitrate before concluding whether an arbitration clause incorporated by reference is valid. Therefore, in order to validly incorporate an arbitration clause by reference, the intention of the parties must extend to making the arbitration clause part of the main contract. Although it is provided under Article 4(2) of the LIA and Article 412(3) of the CPP that the written form requirement will be fulfilled and the arbitration agreement will be deemed valid in terms of arbitration agreements incorporated by reference, the issue here is whether such incorporation includes the will and consent to arbitrate.
Traditionally, if the main contract makes a general reference to a separate document as a whole, instead of an express reference to the arbitration clause contained in the separate contractual document, it becomes debatable whether the parties’ willingness to arbitrate is clear and understandable. It has been stated in the doctrine that a businessperson has the obligation to examine all of the documents that may be added to the main contract by incorporation due to the principle to act as a prudent merchant. Accordingly, if there is a set of standard terms incorporated in the main contract, the relevant businessperson must only provide consent to the main contract if he/she also gives consent to the secondary documents. Otherwise, the terms in the secondary documents incorporated by reference will be binding on the parties who have signed the main contract and an arbitration agreement could be established within this scope.
We believe that this issue should be examined on a case-by-case basis by taking into consideration various factors, such as the experience of the parties and whether those incorporated terms were actually discussed between the parties before the execution of the contract. A party who is not a businessperson may well be bound by a general reference to a separate document if there is evidence that he/she was aware of the content of the referenced documents. Conversely, a businessperson may not be bound by a general reference if he/she is an unexperienced player in an unknown market.
In terms of English law, the English Arbitration Act 1996, Section 6 states that “the reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.” Parallel to this, the decisions rendered following the enactment of this statute indicate that a general wording of incorporation would be adequate, especially when an issue arises between experienced traders.
Similarly, decisions issued by the French courts generally show that enforcement would not be prevented when a general reference has been made to standard terms containing an arbitration clause. In such cases, the matter would be to determine based on whether both of the parties had actual knowledge of and intention to be bound by the relevant arbitration clause.
Whether an Arbitration Clause Incorporated by Reference would be Binding in Case of Assignment of Receivables Under Turkish Law
The effectiveness of an arbitration agreement between the assignee and the debtor following an assignment of receivable is also a matter of debate. In this case, the generally accepted opinion is that the assignee will automatically become a party to the arbitration agreement. Indeed, under Turkish law, if there is no contrary provision in the contract, all pre-emptive rights, except for those specific to the assignor, pass to the assignee together with the accessory rights. Since the arbitration agreement is among the accessory rights, they will pass to the assignee provided that there is no contrary provision in the contract and the main contract has not already been terminated or declared null and void. Here, the principle of severability of an arbitration clause does not constitute a basis for a possible claim that the parties are not bound by the arbitration agreement because the arbitration clause depends on the main contract and follows the fate of the receivable.
A scholar reaches the same result by way of a different reasoning. Accordingly, pursuant to the principle underlying Article 188(1) of the Turkish Code of Obligations that the debtor’s current status must not be aggravated upon an assignment of the receivable, the pleadings that the debtor has against the assigner may, as a rule, also be asserted against the assignee as soon as the debtor becomes aware of the assignment. As the arbitration objection is a type of pleading, it should be possible for the debtor to rely upon an arbitration agreement against the assignee, provided that the debtor had entered into the arbitration agreement before it became aware of the assignment of receivable.
Necessity for Explicit Reference
It is common for businesses to use standard contracts including arbitration clauses in their commercial relationships. Although the LIA and the CCP allow for the incorporation of an arbitration clause by reference in Turkish law, in the absence of an unequivocal position taken by the courts and scholars clarifying the conditions for an effective incorporation in terms of consent, it is highly advisable for businesses to include an express reference to the arbitration clause contained in the separate contractual document in the main contract.